529 Plan 10,000 Per Year Per Child or Per Family New Tax Law
Question 31 a - Sample
The following statement of financial position information relates to Tufa Co, a company listed on a large stock market which pays corporation tax at a rate of 30%.
| $m | $m | |
|---|---|---|
| Equity and liabilities | ||
| Share uppercase | 17 | |
| Retained earnings | 15 | |
| Total equity | 32 | |
| Not-current liabilities | ||
| Long-term borrowings | 13 | |
| Electric current liabilities | 21 | |
| Total liabilities | 34 | |
| Total equity and liabilities | 66 |
The share capital of Tufa Co consists of $12m of ordinary shares and $5m of irredeemable preference shares.
The ordinary shares of Tufa Co have a nominal value of $0·l per share, an ex dividend marketplace price of $seven·07 per share and a cum dividend marketplace price of $7·52 per share. The dividend for 20X7 volition be paid in the near future.
Dividends paid in recent years have been equally follows:
| Twelvemonth | 20X6 | 20X5 | 20X4 | 20X3 |
|---|---|---|---|---|
| Dividend ($/share) | 0·43 | 0·41 | 0·39 | 0·37 |
The 5% preference shares of Tufa Co have a nominal value of $0·50 per share and an ex dividend market price of $0·31 per share.
The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m banking concern loan. The bank loan has a variable involvement rate.
The 7% loan notes have a nominal value of $100 per loan note and a market place cost of $102·34 per loan annotation. Annual interest has just been paid and the loan notes are redeemable in four years' fourth dimension at a v% premium to nominal value.
Required:
(a) Calculate the after-tax weighted average price of capital of Tufa Co on a market value ground. (11 marks)
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Question 32 a - Specimen
DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is $0·50 per share and it expects that its side by side dividend per share, payable in i year's fourth dimension, will exist $0·52 per share.
The capital structure of the visitor is as follows:
| $m | $grand | |
|---|---|---|
| Equity | ||
| Ordinary shares (nominal value $1 per share) | 25 | |
| Reserves | 35 | |
| 60 | ||
| Debt | ||
| Bond A (nominal value $100) | 20 | |
| Bond B (nominal value $100) | 10 | |
| 30 | ||
| 90 |
Bail A will be redeemed at nominal in x years' time and pays almanac interest of 9%. The cost of debt of this bond is 9·83% per yr. The current ex interest market price of the bond is $95·08.
Bond B will be redeemed at nominal in iv years' time and pays annual interest of 8%. The cost of debt of this bond is 7·82% per yr. The current ex involvement market price of the bond is $102·01.
DD Co has a cost of disinterestedness of 12·four%. Ignore taxation.
Required:
(a) Calculate the following values for DD Co:
(i) ex dividend share price, using the dividend growth model; (iii marks)
(two) capital letter gearing (debt divided by debt plus equity) using market values; and (2 marks)
(iii) market value weighted average cost of capital. (two marks)
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Question four a - Sample
Dinla Co has the following upper-case letter structure.
| Equity and reserves | $000 | $000 |
|---|---|---|
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | 270,000 |
| Non-electric current liabilities | ||
| 5% Preference shares | 5,000 | |
| six% Loan notes | 11,000 | |
| Bank loan | 3,000 | |
| nineteen,000 | ||
| 289,000 |
The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future past 4% per year and a dividend of $0·25 per share has just been paid.
The v% preference shares take an ex dividend market value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.
The vi% loan notes of Dinla Co are currently trading at $95·45 per loan annotation on an ex interest basis and volition exist redeemed at their nominal value of $100 per loan note in five years' fourth dimension.
The banking company loan has a fixed interest rate of 7% per year.
Dinla Co pays corporation tax at a charge per unit of 25%.
Required:
(a) Calculate the subsequently-tax weighted average cost of capital of Dinla Co on a market value basis. (8 marks)
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Question 4 b -
KQK Co wants to raise $twenty million in society to expand its business and wishes to evaluate one possibility, which is an issue of 8% loan notes. Extracts from the financial statements of KQK Co are every bit follows.
| $yard | ||
|---|---|---|
| Income | 140·0 | |
| Cost of sales and other expenses | 112·0 | |
| Turn a profit before interest and tax | 28·0 | |
| Finance charges (interest) | ii·8 | |
| Profit before tax | 25·two | |
| Tax | 7·six | |
| Profit after tax | 17·6 | |
| $m | $thou | |
| Equity finance | ||
| Ordinary shares ($1 nominal) | 25·0 | |
| Reserves | 118·five | 143·five |
| Not-current liabilities | 36·0 | |
| Current liabilities | 38·3 | |
| Total equity and liabilities | 217·eight |
Information technology is expected that investing $20 million in the business organisation will increase income by 5% over the offset twelvemonth. Approximately 40% of cost of sales and other expenses are fixed, the residual of these costs are variable. Fixed costs will non exist affected by the business expansion, while variable costs will increment in line with income.
KQK Co pays corporation tax at a charge per unit of 30%. The company has a policy of paying out xl% of profit after revenue enhancement as dividends to shareholders.
Current liabilities are expected to increase past three% past the terminate of the kickoff year following the business expansion.
| Boilerplate values of other companies like to KQK Co: | |
|---|---|
| Debt/equity ratio (book value basis): | 30% |
| Involvement encompass: | 10 times |
| Operational gearing (contribution/PBIT): | 2 times |
| Return on equity: | 15% |
Required:
(b) Discuss the circumstances under which the current weighted average cost of majuscule of a company could be used in investment appraisal and point briefly how its limitations as a discount rate could be overcome. (5 marks)
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MC Question 19 -
On a market place value basis, GFV Co is financed 70% past equity and 30% by debt. The visitor has an after-tax cost of debt of six% and an equity beta of one·2. The adventure-gratis rate of return is iv% and the equity risk premium is 5%.
What is the after-tax weighted average cost of capital of GFV Co?
A. five·iv%
B. seven·two%
C. 8·iii%
D. 8·8%
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Question 5 a -
Tinep Co is planning to raise funds for an expansion of existing business concern activities and in preparation for this the visitor has decided to calculate its weighted boilerplate price of capital letter. Tinep Co has the following capital structure:
| $1000 | $one thousand | |
|---|---|---|
| Equity | ||
| Ordinary shares | 200 | |
| Reserves | 650 | |
| 850 | ||
| Non-electric current liabilities | ||
| Loan notes | 200 | |
| 1,050 |
The ordinary shares of Tinep Co accept a nominal value of 50 cents per share and are currently trading on the stock market on an ex dividend basis at $5·85 per share. Tinep Co has an equity beta of 1·15.
The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex interest ground at $103·l per loan note. The involvement on the loan notes is six% per yr earlier tax and they will be redeemed in six years' fourth dimension at a 6% premium to their nominal value.
The risk-free rate of return is 4% per year and the equity hazard premium is half-dozen% per twelvemonth. Tinep Co pays corporation tax at an annual rate of 25% per year.
Required:
(a) Calculate the market value weighted average cost of capital and the book value weighted boilerplate price of capital of Tinep Co, and comment briefly on whatsoever departure between the two values. (9 marks)
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Question 5 a 3 - Specimen
DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The electric current dividend per share of the company is 50c per share and information technology expects that its next dividend per share, payable in one year's time, volition be 52c per share.
The upper-case letter structure of the visitor is every bit follows:
| $m | $1000 | |
|---|---|---|
| Equity | ||
| Ordinary shares (par value $i per share) | 25 | |
| Reserves | 35 | |
| threescore | ||
| Debt | ||
| Bond A (par value $100) | 20 | |
| Bail B (par value $100) | ten | |
| 30 | ||
| 90 |
Bail A will be redeemed at par in x years' time and pays almanac interest of ix%. The cost of debt of this bond is ix·83% per year. The current ex interest market price of the bail is $95·08.
Bond B will be redeemed at par in four years' time and pays annual involvement of eight%. The cost of debt of this bail is 7·82% per year. The electric current ex involvement marketplace price of the bond is $102·01.
DD Co has a toll of equity of 12·4%. Ignore tax.
Required:
(a) Calculate the post-obit values for DD Co:
(iii) market value weighted average toll of capital. (two marks)
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Question iii a -
The equity beta of Fence Co is 0•nine and the company has issued 10 million ordinary shares. The marketplace value of each ordinary share is $seven•50. The company is as well financed by 7% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' time at nominal value. The bonds have a total nominal value of $14 meg. Interest on the bonds has just been paid and the current market place value of each bond is $107•xiv.
Fence Co plans to invest in a project which is different to its existing business operations and has identified a company in the same business area as the projection, Hex Co. The equity beta of Hex Co is 1•2 and the visitor has an equity market place value of $54 meg. The marketplace value of the debt of Hex Co is $12 million.
The risk-free charge per unit of return is 4% per yr and the average return on the stock market is 11% per year. Both companies pay corporation tax at a rate of 20% per year.
Required:
(a) Calculate the current weighted boilerplate cost of upper-case letter of Argue Co. (7 marks)
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Question 2 c -
Card Co has in consequence viii million shares with an ex dividend marketplace value of $seven·16 per share. A dividend of 62 cents per share for 2013 has just been paid. The blueprint of recent dividends is every bit follows:
| Year | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|
| Dividends per share (cents) | 55.one | 57.9 | 59.one | 62.0 |
Card Co as well has in outcome 8•5% bonds redeemable in five years' time with a total nominal value of $5 million. The market value of each $100 bond is $103•42. Redemption will be at nominal value.
Carte du jour Co is planning to invest a significant amount of coin into a joint venture in a new business area. It has identified a proxy visitor with a similar business risk to the joint venture. The proxy company has an equity beta of 1•038 and is financed 75% by equity and 25% by debt, on a market place value basis.
The current take a chance-complimentary rate of return is four% and the boilerplate equity risk premium is 5%. Carte du jour Co pays profit tax at a rate of 30% per twelvemonth and has an disinterestedness beta of ane•6.
Required:
Calculate the weighted average after-tax cost of capital of Card Co using a price of equity of 12%.
(v marks)
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Question ii a -
AMH Co wishes to calculate its electric current price of capital for use as a discount rate in investment appraisal. The following financial information relates to AMH Co:
The ordinary shares of AMH Co have an ex div market value of $4·70 per share and an ordinary dividend of 36·3 cents per share has only been paid. Historic dividend payments have been as follows:
The preference shares of AMH Co are not redeemable and take an ex div market value of 40 cents per share. The seven% bonds are redeemable at a v% premium to their nominal value of $100 per bond and have an ex interest market place value of $104·50 per bond. The bank loan has a variable involvement rate that has averaged 4% per year in contempo years.
AMH Co pays profit tax at an annual charge per unit of xxx% per twelvemonth.
Required:
Calculate the market value weighted average cost of upper-case letter of AMH Co.
(12 marks)
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Question 3 a, b -
The argument of financial position of BKB Co provides the following information:
| $m | $m | |
| equity finance | ||
| ordinary shares ($i nominal value) | 25 | |
| reserves | 15 | 40 |
| ---- | ||
| non-current liabilities | ||
| 7% convertible bonds ($100 nominal value) | xx | |
| 5% preference shares ($1 nominal value) | 10 | xxx |
| ---- | ||
| current liabilities | ||
| trade payables | 10 | |
| overdraft | 15 | 25 |
| ---- | ---- | |
| total liabilities | 95 | |
| ---- |
BKB Co has an equity beta of 1·two and the ex-dividend market value of the company'due south disinterestedness is $125 million. The ex-interest market place value of the convertible bonds is $21 million and the ex-dividend market value of the preference shares is $half-dozen·25 million.
The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption appointment are both on the same date in v years' time. The current ordinary share cost of BKB Co is expected to increase by 4% per yr for the foreseeable future.
The overdraft has a variable involvement rate which is currently 6% per year and BKB Co expects this to increase in the well-nigh time to come. The overdraft has non inverse in size over the final financial twelvemonth, although one year ago the overdraft interest charge per unit was 4% per yr. The company'due south bank volition non allow the overdraft to increment from its current level.
The equity chance premium is 5% per year and the risk-free rate of render is 4% per year. BKB Co pays profit tax at an annual rate of 30% per year.
Required:
(a) Summate the market value afterward-tax weighted average cost of uppercase of BKB Co, explaining clearly any assumptions you make.
(b) Discuss why market value weighted average cost of capital is preferred to volume value weighted average cost of majuscule when making investment decisions.
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Question 4 c -
Corhig Co is a company that is listed on a major stock exchange. The company has struggled to maintain profitability in the last ii years due to poor economical atmospheric condition in its home country and as a consequence it has decided not to pay a dividend in the current year. However, there are now clear signs of economic recovery and Corhig Co is optimistic that payment of dividends tin exist resumed in the hereafter. Forecast financial information relating to the company is as follows:
| year | 1 | 2 | 3 |
| earnings ($000) | 3000 | 3600 | 4300 |
| dividends ($000) | nil | 500 | thousand |
The company is optimistic that earnings and dividends will increment after Year 3 at a constant annual rate of three% per year.
Corhig Co currently has a before-revenue enhancement cost of debt of 5% per year and an equity beta of ane•six. On a market value basis, the company is currently financed 75% by equity and 25% by debt.
During the course of the concluding 2 years the visitor acted to reduce its gearing and was able to redeem a large amount of debt. Since in that location are now clear signs of economic recovery, Corhig Co plans to raise further debt in lodge to modernise some of its not-current avails and to support the expected growth in earnings.
This additional debt would mean that the capital structure of the company would alter and it would exist financed 60% by equity and xl% past debt on a market value basis. The before-revenue enhancement price of debt of Corhig Co would increment to 6% per year and the equity beta of Corhig Co would increase to 2.
The adventure-gratuitous charge per unit of render is 4% per year and the equity adventure premium is five% per year. In order to stimulate economic activity the government has reduced turn a profit revenue enhancement rate for all big companies to 20% per year.
The current average price/earnings ratio of listed companies similar to Corhig Co is v times.
Required:
Calculate the electric current weighted average after-revenue enhancement cost of capital of Corhig Co and the weighted average afterward-revenue enhancement price of capital letter following the new debt issue, and comment on the difference between the two values.
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Question 3 c -
Recent fiscal data relating to Close Co, a stock market listed company, is as follows.
| $m | ||
| profit later on taxation (earnings) | 66.6 | |
| dividends | 40.0 | |
| statement of financial position information | ||
| $m | $m | |
| not current assets | 595 | |
| current avails | 125 | |
| ------- | ||
| total assets | 720 | |
| ------- | ||
| current liabilities | 70 | |
| equity | ||
| ordinary shares ($1 nominal) | 80 | |
| reserves | 410 | |
| ------- | ||
| 490 | ||
| non electric current liabilities | ||
| half dozen% bank loan | twoscore | |
| 8% bonds ($100 nominal) | 120 | |
| ------- | ||
| 160 | ||
| ------- | ||
| 720 | ||
| ------- |
Financial analysts have forecast that the dividends of Close Co will grow in the future at a rate of 4% per yr. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the company, which is 5% per year.
The finance director of Close Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of eleven% per yr can be used for valuation purposes.
Shut Co has a cost of disinterestedness of 10% per year and a before-tax toll of debt of seven% per year. The viii% bonds volition exist redeemed at nominal value in vi years' time. Close Co pays revenue enhancement at an annual rate of 30% per yr and the ex-dividend share price of the company is $8·50 per share.
Required:
Calculate the weighted average subsequently-tax cost of uppercase of Shut Co using market values where appropriate.
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